Loren Schirber, developer, shows the polluted brownfield on Bush Avenue and Edgerton Street in St. Paul Thursday, Dec. 13, 2018, that could become home to a food truck hall, a solar garden, and 25 to 30 tiny apartments as a result of a federal “Opportunity Zone” program. The program offers federal tax savings to investors who invest in designated distressed census tracts. (Jean Pieri / Pioneer Press)

So what are “O-Zones,” or Opportunity Zones? Distressed areas. Tax shelters. Opportunities for urban — and rural — renewal. The outcroppings of a federal effort to marry philanthropy, private-sector tax avoidance and housing advocacy.

Others might sum them up in a single word: Hope.

When President Donald Trump signed the 2017 tax-cut bill into law, media coverage mostly glossed over part of the legislation known as the “Investing in Opportunity Act.” The act created tax incentives for private-sector investors to take capital gains profits and funnel them to distressed areas.

The first time Stolpestad participated in a presentation on O-Zones, at least 100 elected officials, urban planners, developers, housing advocates, accountants and entrepreneurs tuned in to listen. Last week, the audience for a real estate conference at the Golden Valley Country Club had grown to 400.

“This is predicted to be the biggest tool for economic development in the history of the U.S.,” said the St. Paul-based finance instructor and housing developer.

Whether those predictions are accurate remains to be seen, but the city of St. Paul is on board.

The city’s department of Planning and Economic Development recently promoted project manager Marie Franchett as its Opportunity Zones coordinator to focus on them. Minneapolis has created a similar position.

In exchange for both federal tax deferrals and tax forgiveness, funds can be invested in housing, commercial projects, rehabilitation of historic buildings, renewable energy such as solar farms, or infrastructure that generates tolls or user fees. Local and state taxes still apply.

Each governor was allowed to pick one-fourth of the low-income census tracts — areas spanning 20,000 people — in their state.

After asking counties for input, Gov. Mark Dayton followed through last spring by nominating 128 census tracts in Minnesota as distressed areas that would be eligible for funding. All 128 Opportunity Zones were approved in May by the U.S. Department of Treasury.

St. Paul and Ramsey County recently collaborated to propose that a series of census tracts be designated Opportunity Zones. With Gov. Mark Daytons support, 19 of their recommendations were adopted by the U.S. Department of the Treasury, most of them in St. Paul. The zones, which span low-income areas, allow taxpayers to rollover capital gains into real estate development, without paying federal taxes until 2026. The projects  which can range from affordable or market-rate housing to solar garden installations  can appreciate in value free of new federal taxes for 10 years. (Courtesy of the City of St. Paul)

Statewide, about half the zones sit in rural areas, and together the zones are home to 500,000 people, or 10 percent of the state population.

“I’m eager to deploy this unusual new program in areas where other catalysts have not been the right incentive,” said St. Paul City Council President Amy Brendmoen. She pointed to the intersection of Rice Street and Larpenteur Avenue as one area “where the need is highest, and frankly, overdue.”

‘IT’S A RACE’

In Stolpestad’s view, no one is moving fast enough to pitch projects and lure national investors to fund them.

“Other states are ahead of us, and they’ve been more strategic and action-oriented to try to get this capital,” Stolpestad said.

“It’s a race,” he added. “To maximize the tax incentives, the fund has to deploy capital before the end of 2019. That’s why we’ve been screaming at the top of our lungs since May and June, ‘Identify projects! Identify projects!’ ”

Stolpestad said he received a call from AECOM, the Los Angeles-based developer chosen by the Ramsey County Board to develop its vacant property along Kellogg Boulevard, the former site of West Publishing and the adult detention center, into towers of housing and office space.

“AECOM called us and said, do you want to fund this project?” Stolpestad said. “I said, let’s talk.”

By “us,” he’s referring to Minnesota Opportunity Zones Advisors, or Mn-Oza.com, one of the groups leading the charge on educating investors, real estate development professionals and housing advocates on the practical and legal details, of which there are many.

Some caution that O-Zones primarily represent opportunities for private-sector investment. Other than providing general information and nominating and highlighting potential development sites, the rest is up to investors and developers.

When it comes to O-Zones, “it’s not the job of state government to allocate resources,” said Jessica Deegan, director of federal affairs for the Minnesota Housing Finance Agency. “It’s really difficult to make any predictions. We don’t have any official role as state government as to what happens from here on out.”

Amy McCulloch, deputy director of the St. Paul-based Twin Cities Local Initiatives Support Corp., is working closely with Mn-Oza, but she has reservations.

“Really, the jury’s out on this,” said McCulloch, whose organization invests in affordable housing and community development projects. “It’s really difficult to make projects work in (challenged) neighborhoods. I don’t know that the private marketplace is going to be able to do this easily, and get the kind of returns that they’re expecting.”

She noted there are no requirements for reporting social impact such as job creation or affordable-housing units.

“So it’s really a wild card,” she said. “To the extent we can drive social benefit projects that include the community, that’s what would be a home run for us.”

Cities such as Minneapolis have signaled to the investment community that they’re seeking O-Zone projects that deliver a social good, such as affordable housing, rather than upscale housing.

Other cities have hired their own brokers and placed fewer restrictions. Some just want something built to fill empty land and pay local property taxes.

The O-Zone legislation was championed by, among others, a liberal stalwart and possible presidential contender — U.S. Sen. Cory Booker, D-N.J. — hand-in-hand with U.S. Sen. Timothy Scott, R-S.C., and tech billionaire Sean Parker, a former Facebook president and creator of the online music platform Napster.

As a result, political observers are calling the O-Zones one of the few tangible bipartisan efforts in recent years. But it’s too soon to call them success stories. The stakes are huge for investors and impoverished areas alike.

Last July, former Wall Street trade manager Steven Bertoni put it this way in his cover story for Forbes Magazine: “If everything goes right, a big slice of the estimated $6.1 trillion of paper profits currently resting on American balance sheets is about to go to work to revitalize America’s depressed communities. If all goes wrong, however, it will prove to be one of the biggest tax giveaways in American history, all in service of gentrifying neighborhoods and expelling local residents.”

REWRITING PLANS

Near St. Paul’s Raymond Avenue Green Line station, developer Jamie Stolpestad plans to build up to 12 new apartments next to and above the Lakes and Plains building in South St. Anthony Park. (Courtesy of Snow Krelich Architects)

Stolpestad sees plenty of promise. In fact, the O-Zone near Raymond and University avenues in St. Paul has already inspired him to rip up and redraw plans for new housing there.

He once proposed installing up to nine new condominiums above and around an old carpenters union hall at 842 Raymond Ave., south of Long Avenue. Selling the condos, however, would disqualify his development firm, EG Capital, from the major tax benefits of the O-Zone, which kick in after 10 years.

As such, he’s now tweaking the plan in order to install nine to 12 apartments instead of condos.

“Because this project is now within a qualified Opportunity Zone, we are reformatting it as rental housing,” Stolpestad said.

Through Minnesota Opportunity Zones Advisors, Stolpestad is part of a group of investors and real estate development professionals attempting to create a $100 million investment fund to back O-Zone projects across the state.

Commercial real estate adviser Craig Estrem is on board as a managing partner. So is Schirber, a developer who has proposed 25 to 30 units of micro-apartments at the future East Yard Tiny Home Village at 629 Bush Ave. on St. Paul’s East Side.

The three partners and two employees are working closely with advisory board members Rick Beeson, vice president of Sunrise Banks; McCulloch of LISC; and Ferdinand Peters, a St. Paul-based attorney.

“We’re tackling a pretty broad geography and a lot of projects,” Stolpestad said. “It’s gotten a lot of attention in the real estate community, in the accounting community and in the legal community.”

Investments in O-Zones can come from anywhere, even overseas, but there’s a disincentive toward building a project, selling it at a profit and walking away. On its website, the IRS notes that tax incentives are greatest for investors who hold onto properties for five, seven or 10 years. Almost all capital gains qualify for tax deferrals until the end of 2026.

HOW IT WORKS

A taxpayer sells an asset, such as a building, at a profit. Instead of paying federal capital gains taxes immediately, she can invest the profit in an Opportunity Zone fund, and her taxes won’t come due until the end of 2026. The fund invests in projects within distressed census tracts designated by the state and the U.S. Department of Treasury.

The money can be used to support new housing, commercial projects, rehabilitation of historic buildings, renewable energy such as solar farms, or infrastructure that generates tolls or user fees. After 10 years, the investor can sell her share without having to pay federal tax on the appreciated value. State and local taxes would still apply. The fund is required to invest 90 percent of its assets in Opportunity Zone real estate projects or businesses.

Frederick Melo was once sued by a reader for $2 million but kept on writing. He came to the Pioneer Press in 2005 and brings a testy East Coast attitude to St. Paul beat reporting. He spent nearly six years covering crime in the Dakota County courts before switching focus to the St. Paul mayor's office, city council, and all things neighborhood-related, from the city's churches to its parks and light rail. A resident of Hamline-Midway, he is married to a Frogtown woman. He Tweets with manic intensity at @FrederickMelo.

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